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The current economic recovery is the longest and most persistent at least since the Great Depression.  Despite trillions of dollars in QE money and near zero Fed funds interest rate for over 6 years, the economy is not yet back to where it was pre recession.  We are witnessing a shift to a new economic reality, where traditional economic measures are not enough to overcome the emotional side of economics – financial uncertainty and anxiety.

Past recessions and recoveries used to have fast economic decline and somewhat rapid recovery; also known as “V” shape or “U”Shape recessions.  Not this time.  Although the economic decline of the last recession was very fast, the recovery is not.  The main reason for the prolonged recovery is that consumers and businesses practice caution and hesitation when it comes to resumption of spending and expansion.

The cautionary resumption of economic activities is evident in the Money Anxiety Index, which measures the level of consumer financial uncertainty and anxiety.  On the eve of the Great Recession, in November of 2007, the Money Anxiety Index stood at 58.6 compared to 64.6 in May of this year.  Despite a time period of over 7 years, the level of financial anxiety is not yet back to where it was pre recession.  Such slow and gradual improvement in the level of consumer financial confidence points to the growing role emotions, such as financial uncertainty and anxiety, have in economic recoveries.

“We can no longer measure economic activity only with hard indices” says Dr. Dan Geller, the developer of the Money Anxiety Index and the author of the book Money Anxiety, “we must also consider the soft side of economics represented by consumers’ financial uncertainty and anxiety”.
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress associated with their spending and savings pattern.  The Money Anxiety Index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  

 


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